perspectives on Bitcoin and second-generation cryptocurrencies
(2015)

Bitcoin has emerged as the most successful cryptographic currency in history. Within two years of its quiet launch in 2009, Bitcoin grew to comprise billions of dollars of economic value, even while the body of published research and security analysis justifying the system’s design was negligible. In the ensuing years, a growing literature has identified hidden-butimportant properties of the system, discovered attacks, proposed promising alternatives, and singled out difficult future challenges. This interest has been complemented by a large and vibrant community of open-source developers who steward the system, while proposing and deploying numerous modifications and extensions. We provide the first systematic exposition of the second generation of cryptocurrencies, including Bitcoin and the many alternatives that have been implemented as alternate protocols or “altcoins.” Drawing from a scattered body of knowledge, we put forward three key components of Bitcoin’s design that can be decoupled, enabling a more insightful analysis of Bitcoin’s properties and its proposed modifications and extensions. We contextualize the literature into five central properties capturing blockchain stability. We map the design space for numerous proposed modification, providing comparative analyses for alternative consensus mechanisms, currency allocation mechanisms, computational puzzles, and key management tools. We focus on anonymity issues in Bitcoin and provide an evaluation framework for analyzing a variety of proposals for enhancing unlinkability. Finally we provide new insights on a what we term disintermediation protocols, which absolve the need for trusted intermediaries in an interesting set of applications. We identify three general disintermediation strategies and provide a detailed comparative cost analysis. I. WHY BITCOIN IS WORTHY OF RESEARCH Consider two opposing viewpoints on Bitcoin in straw-man form. The first is that “Bitcoin works in practice, but not in theory.” At times devoted members of the Bitcoin community espouse this philosophy and criticize the security research community for failing to discover Bitcoin, not immediately recognizing its novelty, and still today dismissing its importance due to a lack of rigorous theoretical foundation. A second viewpoint is that Bitcoin hopelessly relies on an unknown combination of socio-economic factors for its current stability which are intractable to model with sufficient precision, failing to yield a convincing argument for the system’s soundness. Given these difficulties, experienced security researchers may avoid Bitcoin as a topic of study, considering it prudent security engineering to only design systems with precise threat models that admit formal security proofs. We strongly dismiss both of these simplistic approaches and show where each viewpoint fails, forwarding new insights based on multiple examples of existing knowledge. To the first, we contend that while Bitcoin has worked surprisingly well in practice so far, there is an important role for research to play in identifying precisely why this has been possible, moving beyond a blind acceptance of the informal arguments presented with the system’s initial proposal. Furthermore, it is crucial to understand whether Bitcoin will still “work in practice” as practices change. We expect external political and economic factors to evolve, and the system must change if and when transaction volume scales, and the nature of the monetary rewards for Bitcoin miners will change over time as part of the system design. It is not enough to argue that Bitcoin has worked from 2009–2014 and will therefore continue likewise. We do not yet have sufficient understanding to conclude with confidence that Bitcoin will continue to work well in practice, and that is a crucial research challenge that requires insight from computer science theory. To the second viewpoint, we contend that Bitcoin is filling an important niche by providing a virtual currency system without any trusted parties and without pre-assumed identities among the participants. Within these constraints, the general problem of consensus in a distributed system is impossible [5], [81] without further assumptions like Bitcoin’s premise that rational (greedy) behavior can be modeled and incentives can be aligned to ensure secure operation of the consensus algorithm. Yet these constraints matter in practice, both philosophically and technically, and Bitcoin’s approach to consensus within this model is deeply surprising and a fundamental contribution. Bitcoin’s core consensus protocol also has profound implications for many other computer security problems beyond currency1 such as distributed naming, secure timestamping and commitment, generation of public randomness, as well as many financial problems such as self-enforcing (“smart”) contracts, decentralized markets and order books, and distributed autonomous agents. In short, even though Bitcoin is not easy to model, it is worthy of considerable research attention as it may form the basis for practical solutions to exceedingly difficult and important problems. II. OVERVIEW OF BITCOIN A. A Contextualized History We refer the interested reader to existing surveys on the “first wave” of cryptocurrency research [13], [82]. In short, cryptographic currencies date back to Chaum’s proposal for 1As we shall see, it may not be possible to remove the currency functionality and still have a working consensus system. “untraceable payments” in 1983 [22], a system involving bankissued cash in the form of blindly signed coins. Unblinded coins are transferred between users and merchants, and redeemable after the bank verifies they have not been previously redeemed. Blind signatures prevent the bank from linking users to coins, providing unlinkability akin to cash. Throughout the 1990s, many variations and extensions of this scheme were proposed. Significant contributions include: removing the need for the bank to be online at purchase time [23], allowing coins to be divided into smaller units [80] and improving efficiency [21]. Several startup companies including DigiCash [95] and Peppercoin [87] attempted to bring electronic cash protocols into practice but ultimately failed in the market. In fact, no schemes from this “first wave” of cryptocurrency research achieved significant deployment. Moderately hard “proof-of-work” puzzles were proposed in the early 1990s for combatting email spam [34] (although it was never widely deployed for this purpose [59]). Many other applications followed, including proposals for a fair lottery [41], minting coins for micropayments [88], and preventing various forms of denial-of-service and abuse in anonymous networks [8]. The latter, Hashcash, was an alternative to using digital micropayments (e.g., NetBill [98] and Karma [107]). Proof of work was also used to detect sybil nodes in distributed peer-to-peer consensus protocols [5], and is used in Bitcoin consensus for a similar reason. Another essential element of Bitcoin is the public ledger, which makes double-spending detectable. In auditable ecash [93], [94], proposed in the late 1990s, the bank maintains a public database to detect double-spending and ensure the validity of coins, however the notion of publishing the entire set of valid coins was dismissed as impractical (only a Merkle root was published instead). B-money [29], proposed in 1998, appears to be the first system where all transactions are publicly (anonymously) broadcast and stored. Proposed on the Cypherpunks mailing list, b-money received minimal attention from the academic research community. Smart contracts [102], proposed in the early 1990s, enable parties to formally specify an enforceable agreement using cryptography and scripts. This idea portends Bitcoin’s scripting capabilities. In 2008, Bitcoin was announced and a white paper penned under the pseudonym Satoshi Nakamoto was posted to the Cypherpunks mailing list [77], followed quickly the source code of the original reference client. Bitcoin’s genesis block was mined on or around January 3, 2009.2 The first use of Bitcoin as a currency is thought to be a transaction in May 2010, where one user ordered pizza delivery for another in exchange for 10 000 bitcoins. Since then, increasing number of merchants and services have incorporated Bitcoin in some way, and the price has generally risen, reaching a peak of approximately $1400USD per coin in July 2013. Bitcoin’s history has also been colored by association with 2Famously, the first block contains the string “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” crime. Bitcoin was famously used in a black market website, Silk Road [24], which operated from Feb. 2011 until Oct. 2013 when it was seized and shut down by the FBI. Botnets have found Bitcoin mining to be a supplemental source of income [46]. A current US federal court case involves a large Bitcoin-based Ponzi scheme [97]. In 2014, a computer virus called CryptoLocker extorted millions of dollars from victims by encrypting their files and demanding a Bitcoin ransom to release the decryption key [38]. Many users’ Bitcoins have been lost due to theft [33] and collapsed exchanges [75]. B. A Technical Overview We present Bitcoin’s current operation through its three main technical components: transactions (including scripts), the consensus protocol, and the communication network. Bitcoin is exceedingly complex—our goal is to present the system with sufficient technical depth, so the extant literature on Bitcoin, reviewed and evaluated in later sections of this paper, becomes understandable. In particular, a key benefit of our three-component breakdown is that it makes evaluating and systematizing proposed changes (Sections V & VIII) insightful by “decoupling” concepts that may be changed independently. Sources of information on Bitcoin. Bitcoin can be difficult to define as there is no formal